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How to file taxes as a smart investor

M1 Team
M1 Team December 1, 2023
How to file taxes as a smart investor with the M1 logo in the bottom right corner above an image of a person using a laptop to explore the M1 website

Spring is right around the corner. In no time, baseball will be back, the sun will be shining, and it will be tax season.

Well, maybe tax season feels more like seasonal allergies than a picnic in the park each spring, but it doesn’t have to. We looked through dozens of resources and compiled the information you need to be prepared and motivated to file your taxes.

You’ll learn the benefits of filing early, what documents you’ll need, and options for that coveted tax refund.

Here’s what you need to know about filing taxes as a smart investor:

Don’t wait until the last minute

Like most years, the deadline to file in 2024 is April 15th.

Here are a few key reasons why you shouldn’t wait until April to file this year.

1. The sooner you file, the sooner you get your refund

According to the IRS, as of April 21st last year, the average refund amount was $2,753.

If you’re owed a refund, that money is waiting for you! Simply put: the sooner you get your tax return — and money.

The IRS also recommends direct deposit rather than traditional paper checks. They note a direct deposit is a faster, safer, more cost-efficient method of receiving your check.

2. Taxes are time-consuming

We get it: figuring out how to file taxes is exhausting and time-consuming. According to the IRS, the average taxpayer spends 13 hours completing their taxes.

That’s six hours of recordkeeping, two hours of tax planning, four hours of completing and submitting forms, and one hour on other processes (like reviewing your tax return).

How long is 13 hours? That’s enough time to:

  • Binge watch a season of TV
  • Listen to The Beatles entire catalog
  • Fly from LA to Berlin

And it doesn’t even include the time you spend educating yourself on taxes.

3. Avoid late fees

Last-minute mistakes and unexpected obstacles can present tricky situations when filling out taxes. And the last thing you want on your tax return is a fee.

You may run into an incorrect form, missing information, or another unexpected obstacle. If you’re investing, your brokerage may even send you updated paperwork up to a specific deadline.

Giving yourself plenty of time to correct mistakes and locate information can eliminate costly late penalties, especially if you have a tax bill.

Collect your tax documents

Tax returns can get pretty detailed. You’ll likely need to submit several documents connected to your income and expenses, which can include everything from your job to specific investments. According to H&R Block, this is the information you’ll need on hand when filling out your tax forms:

1. Personal information

  • US taxpayers must provide the following information to file their tax return:
  • Your social security number or tax ID number
  • Your spouse’s full name, social security number or tax ID number, and date of birth
  • Routing and account numbers to receive your refund by direct deposit or pay your balance due (if you have one and choose to pay this way)

2. Dependent information

Parents and caregivers will also need to gather information about any dependents for their tax returns. This information can help tap into different deductions, like a deduction on college tuition for any college student dependents. If you’re a parent or caregiver, you’ll need:

  • Dates of birth and social security numbers or tax ID numbers of dependents
  • Childcare records (including the provider’s tax ID number) if applicable
  • Income of dependents and other adults in your home

3. Sources of income

You may not need all these forms to file taxes every year. Here are some examples of the most common forms and information you may need to file:

Employed

  • Forms W-2

Unemployed

  • Unemployment (1099-G)

Self-Employed

  • Forms 1099, Schedules K-1, income records to verify amounts not reported on 1099-MISC or new 1099-NEC
  • Records of all expenses — check registers or credit card statements, and receipts
  • Record of estimated tax payments made (Form 1040–ES)

Rental Income

  • Records of income and expenses
  • Rental asset information (cost, date placed in service, etc.) for depreciation
  • Record of estimated tax payments made (Form 1040–ES)

Retirement Income

  • Pension/IRA/annuity income (1099-R)
  • Traditional IRA basis (i.e., amounts you contributed to the IRA that were already taxed)

Investments, dividends, and certain savings accounts

  • Interest, dividend income (1099-INT, 1099-OID, 1099-DIV)
  • Income from sales of stock or other property (1099-B, 1099-S)
  • Health Savings Account and long-term care reimbursements (1099-SA or 1099-LTC)
  • Expenses related to your investments
  • Transactions involving cryptocurrency (virtual currency)

If you’re investing with M1, you can find all your M1 tax forms in your account under the Documents tab in Settings.

Understand possible deductions

Taxes are based on income, but that income can be reduced with certain deductions. For example, you may be able to subtract the amount of a donation you made to a qualifying nonprofit (up to a certain amount). It doesn’t reduce your tax bill directly — it reduces your taxable income, which could reduce your tax bill.

Deductions are an important part of a smart investor’s tax return.

If you’re working with a tax professional to file your return, you may not need to know every detail about every deduction. If you’re filing your tax return on your own, you may need to spend some more time reading.

In general, deductions tend to fall into a few main categories.

Home ownership

  • Forms 1098 or other mortgage interest statements
  • Real estate and personal property tax records

Charitable donations

  • Cash amounts donated to houses of worship, schools, other charitable organizations

Medical expenses

  • Amounts paid for healthcare, insurance, and to doctors, dentists, and hospitals

Health insurance

  • Form 1095-A if you enrolled in an insurance plan through the Marketplace (Exchange)

Childcare expenses

  • Fees paid to a licensed daycare center or family daycare for the care of an infant or preschooler
  • Amounts paid to a baby-sitter or provider caring for your child under age 13 while you work
  • Expenses paid through a dependent care flexible spending account at work

Educational expenses

  • Forms 1098-T from educational institutions
  • Records of any scholarships or fellowships you received
  • Form 1098-E if you paid student loan interest

State & local taxes

  • Amount of state and local income or sales tax paid (other than wage withholding)

Retirement & other savings

  • Form 5498-SA showing HSA contributions
  • Form 5498 showing IRA contributions

Federally declared disaster

  • Check the FEMA website to see if your county has been declared a federal disaster area

Decide how you will file

File online

The IRS expects that 90% of people will file online (they call it e-file) and provides six reasons why:

  1. It’s the fastest way to get a refund
  2. It’s secure
  3. It’s convenient
  4. You get a quick acknowledgment.
  5. It’s often free.
  6. There are several options for making payments.

There are several resources, services, and tools for filing online. You can go directly through the IRS, or a third-party tool, depending on your preferences.

M1 integrates with popular services like H&R Block and Turbo Tax to give you a seamless filing process.

Work with a tax professional

You don’t have to file taxes on your own. No matter how complicated or straightforward your taxes are, you can work with a tax professional to sort through tax forms, deductions, and filing your tax return.

Tax professionals can also help make corrections to your tax return if you receive updated paperwork. (If you do receive updated paperwork, it’s typically allowed up to a specific date.)

If you’re planning to work with a tax professional, you have a few options.

Some of the popular online options, like TurboTax and H&R Block, have packages where tax professionals can file your taxes or provide advice as needed.

There are also more traditional options, such as H&R Block, Jackson Hewitt, and local tax professionals. You can either drop off your taxes for completion or schedule a sit-down consultation.

Remember: the closer we get to Tax Day, the busier tax professionals become! If you’re considering working with one, get in touch soon and send your tax documents over. You’ll thank yourself later if you get started early.

Make a plan for your tax refund

Like other parts of your financial life, your tax refund needs a plan. When you have a long-term mindset, that can feel even more important. While the plan you build for your tax refund is unique to your situation, here’s a refresher of the different levels involved in financial well-being:

Cover basic needs

If you’re struggling to keep up on rent, bills, or groceries, use your refund on necessities.

Build (or add to) an emergency fund

An emergency fund is a crucial aspect of financial security. Many smart investors keep an emergency fund with 3-6 months’ worth of living expenses.

You can choose to keep your emergency fund in an FDIC-insured bank account or brokerage account (just keep risk in mind). If you opt for a bank, look for an account with a high annual percentage yield so you can earn interest on your savings.

Pay off high-interest debt

High-interest debt is costly and can be a burden on your finances. High-interest debts include:

  • Credit card debt
  • Payday loans
  • Private student loans
  • Personal loans for big purchases (like a vacation or a car)

Consider using your tax refund to pay some of it off. You could also explore other options, like a portfolio line of credit.

If you have flexibility with your tax refund

If you feel secure with your finances and none of the previous situations apply, you can:

Use a portion of your refund to give back to your favorite nonprofit.

Spend it

If you’re spending some of your check, think about putting those dollars to use at a local small business or restaurant affected by the pandemic.

Save it

Whether it’s your first trip in a while or another big purchase, you can save your tax refund money in a bank account or brokerage account. We’ve seen some clients build different Pies for various savings goals and risk tolerances.

Invest it

Just like with stimulus checks, many Americans will be investing a portion of their tax return.

Investing your check can be a fantastic option if you’re looking to build long-term wealth and feel comfortable with your financial situation.

How to invest your tax return

You’ll want to stick to your plan if you’re investing to build long-term wealth. Think of your tax refund as a bonus contribution. A mini gift for future you, all because you filed your taxes.

If you already built your portfolio and have a strategy, deposit your check into your favorite brokerage account and let it grow.

If you’re a new investor, don’t like your current brokerage, or want to explore what’s next in personal finance, check out M1.

Remember, the race to financial wellness is not a sprint. It’s a marathon. So be careful about the temptation that can bubble up around seemingly extra money. There are many trendy investments out there — the key is to invest in those that align with your plan and your goals.

Go ahead and file

You made it through an entire post about taxes! Now all that’s left is to get those taxes filed, check them off your to-do list, and have more time for your favorite spring activities.

M1 and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.